As the economic and financial crisis resulting from the COVID-19 pandemic continues to develop and unfold across the US, it is inevitable that US insurers will see losses in their investment portfolios. To protect against concerns about insurers' solvency, US states will likely have to allow “permitted practices” from some of the statutory accounting rules which apply to US insurers.
As the economic and financial crisis resulting from the COVID-19 pandemic continues to develop and unfold across the US, it is inevitable that US insurers will see losses in their investment portfolios. Although US insurers are subject to a range of investment regulations and restrictions that are intended to protect their assets, the current broad-based hit to values across asset classes will be felt on the balance sheets of insurers in the coming weeks and months. To protect against concerns about insurers' solvency, US states will likely have to allow “permitted practices” from some of the statutory accounting rules which apply to US insurers.
During the NAIC COVID-19 Special Session on March 20, 2020, industry representatives expressed confidence in the current level of insurer reserves. Nonetheless, it will likely be necessary for the states to relax various accounting rules to protect the insurers’ solvency. States took such an approach, for example, during and after the 2008 financial crisis, when permitted practices proliferated across the US states. See, e.g., OH Bulletin No. 2009-4 (permitting licensed insurers to determine the admitted amount of deferred income tax assets in accordance with requirements which varied from SSAP No. 10).
State insurance regulators have broad discretion to grant such permitted practices and will likely need to do so again during the current crisis. However, states are required to follow the protocol set out by the National Association of Insurance Commissioners (NAIC) when states allow a permitted practice based on which an insurer can deviate from the accounting practices set forth in the NAIC Accounting Practices and Procedures Manual. Among other things, the NAIC’s protocol requires a state considering the grant of a permitted practice to give advance notice to other states in which the insurer to be granted a permitted practice is licensed.
In addition, to protect insurers from solvency concerns, it will also be important that society’s costs and burdens resulting from the COVID-19 pandemic not be unfairly imposed on insurers. For example, several state legislatures are rushing to pass legislation requiring property insurance to cover business interruption even if the existing insurance policies did not otherwise cover business interruption or contained exclusions against such coverage. Through such actions, state legislatures would worsen the financial solvency concerns for insurers which state insurance regulators will be working to avoid through the use of permitted practices.